Question
In early October, a U.S. Company is expecting to pay2,250,000 Euros in December to its European suppliers and wants to hedge against a rise in
- In early October, a U.S. Company is expecting to pay2,250,000 Eurosin December to its European suppliersand wants to hedge against a rise in the value of the Euro relative to the U.S. dollar in December.
At this time in early Octoberthe spot exchange rate Eurowas $1.175 USD. The CME Group future settle rate for December Euro FX futures contactsat this time is listed as 1 Euro = $1.1651USD, with each futures contract for 125,000 Euros per contract.
a. What position and how many contracts should the financial manager take for the hedge? Explain why. (hint # contracts = Amount of Euros Hedging / 125,000 Euros per contract),
Type of Position __Why this Position__________
Number of Contracts______
- Suppose in December the spot rate for the Euro rises to $1.190 USDand the futures settle ratechanges to$1.1180 USD. Calculate the spot opportunity loss or gain for the company and the futures gain or loss. What is the net hedging result?
Spot Gain or Loss ________ Futures Gain or Loss ________
Net Hedging Result ___________(Futures Gain or Loss Spot Gain or Loss)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started